20-09-2019

MET-304(Operation & Planning Control)

Syllabus
• Forecasting models,
• Facilities Location & Layout Planning,
• Scheduling, routing, sequencing,
• Aggregate Production planning,
• Capacity planning,
• Inventory Control,
• Material requirement Planning, J
• ust in Time,
• Enterprise Resource Planning.

Reference Books
1) Factory Physics: Foundations of Manufacturing
Management, third edition, 2008.
2) Russel, R.S. and Taylor III, B.W., Operations
Management, 4th Edition, Pearson Education, 2003.
3) Chase, R.B., Aquilano, N.J., and Jacobs, F.R.,
“Operation Management for Competitive Advantage”,
9th Edition, Tata McGraw-Hill, Delhi, 2002.
4) Adam, E.E and Ebert, R.J., Production & Operations
Management, 5th Ed., PHI, 1993.
5) Krajewski, L. J., and Ritzman, L.P., “Operations
Management: Strategy and Analysis”, 6th Edition,
Pearson Education Asia, India, 2003

1
 20-09-2019

Challenge
• Changing market conditions
• Rate of change is also very faster
• Global competition
• Needs to be proactive
• Increased customer focus,

Changing Customer
• Availability
• Price
• Quality
• Variety
• Buy frequently
• More value for Money

2
 20-09-2019

Requirement of Manufacturing
• Increasing variety of products
• Shorter lead times
• Introduce new technology
– Today manufacturing has to face local and
foreign competition from other companies
• Automation

Events in history
• The War: Resource availability
• Computer: Cost & Information control
• Quantitative methods: Doing things well
• Communication System: Personal touch
• E-commerce: Doorstep
• Home offices

3
 20-09-2019

Operations as a Transformation Process

Evolution of
Operations planning and control

4
 20-09-2019

Historical Events
in Operations

Historical Events
in Operations

5
 20-09-2019

Evolution of
Operations planning and control
• The period up to the 1960s – Inventory
control
– MTM,EOQ,Gantt Chart
• The 1970s – The MRP era
• The 1980s – Master production scheduling
and MRP II
• The 1990s – Sales and operations
planning and ERP
• The 2000s – Supply chain planning

Evolution of planning and control focus, product

level, system design, and key concepts

6
 20-09-2019

Methodology-Traditional Approached

• Line layout
– Product layout
• Process layout
– Batch Production
• Quality
– SQC: Focus on measure and conformance to
specification

Methodology-Process
Improvement
• Group Technology • JIT
– Ownership and responsibility • Waste elimination
• Inventory reduction
– Reorganizing Machine
• Lean Manufacturing
– Group of parts and machine • FMS (Automation)
– Cellular Manufacturing • Technology solution

7
 20-09-2019

Methodology-Human Resource
& Processes
• TQM
– Focus on people, Quality Circle, Employee empowerment

• BPR
– Management reengineering

• ISO 9000
– Certification and recognition of system in place

Methodology: Information
System and Decisions
• MRP
– Inventory reduction, B.O.M., Lot Sizing, Pull system
• ERP
• Integration the various functions(Quality, Production,
Procurement, HR)
• SCM
• Decision Making, Production and Distribution
Supplier(Integration)

8
 20-09-2019

Methodology: Business
perspective
• BPR
• Synchronous Manufacturing (The Goal)
• Agility
– Empowering the customer, Cooperate and
compete

Goal of the Organisation

• Firm is to make money
• Money is time
• Need to minimize cost and time
• Time incur due to delay
– Delay: Raw material(Placing order,Lead time)
– Delay: WIP(Machine breakdown,Setup..)
– Delay: Finish Goods(Assembly busy..)

9
 20-09-2019

Manufacturing deals with

making a product
Need to know is the Organization should have the
demand for the product capacity to meet the demand
(Estimated by of these products
Forecasting) (Regular time capacity, over
time capacity and outsourcing )

Rush Order
Combination of demand What are the products to be
and capacity results in produced and how much of
what is called the this capacity is going to be
Combination of demand production planning, utilized in each period ,
and capacity results in Machine
what is called the Making disaggregation,
production plan, where the time that is Capacity is provided by
available is now given to machines and these
various products, time machines have linkages
Scheduling also gets with quality and with
allotted to various
inputs from materials and maintenance ,
products
inventory
Scheduling

Production Use

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Forecasting

Rajeev Agrawal, MET-304 (Introduction)

10
 20-09-2019

Forecasting is essential for a

number of planning decisions
 LONG TERM DECISIONS
- New Product Introduction
- Plant Expansion
 MEDIUM TERM DECISIONS
- Aggregate Production Planning
- Manpower Planning
- Inventory Policy
 SHORT TERM DECISIONS
- Production planning
- Scheduling of job orders

OBJECTIVES

• Demand Management
• Qualitative Forecasting Methods
• Simple & Weighted Moving
Average Forecasts
• Exponential Smoothing
• Simple Linear Regression
• Web-Based Forecasting

11
 20-09-2019

Forecasting Models
Forecasting
Techniques

Qualitative Time Series

Models Methods

Delphi
Naive
Method
Moving
Jury of Executive
Average
Opinion
Weighted
Sales Force
Moving Average
Composite
Exponential
Consumer Market
Smoothing
Survey

Trend Analysis
Causal
Methods
Seasonality
Simple Analysis
Regression
Analysis Multiplicative
Decomposition
Multiple
Regression
Analysis

12
 20-09-2019

Types of Forecasts

• Qualitative (Judgmental)
• Quantitative
– Time Series Analysis
– Causal Relationships (linear regression)
– Simulation

Choosing the Type of

Forecasting Technique
• Judgment methods: A type of qualitative method that
translates the opinions of managers, expert opinions,
consumer surveys, and sales force estimates into quantitative
estimates.
• Causal methods: A type of quantitative method that uses
historical data on independent variables, such as promotional
campaigns, economic conditions, and competitors’ actions, to
predict demand.
• Time-series analysis: A statistical approach that relies heavily
on historical demand data to project the future size of demand
and recognizes trends and seasonal patterns.
• Collaborative planning, forecasting, and replenishment
(CPFR): A nine-step process for value-chain management that
allows a manufacturer and its customers to collaborate on
making the forecast by using the Internet.

13
 20-09-2019

PLANNING PROCESS
A Forecast of Demand is an essential Input for
Planning
System
Objectives

Demand System to be Plan of

Forecast Managed Action

Constraints
- Budget / Space
Resources
- Men
- Equipment

Forecasting Models
(a) Subjective or intuitive methods
- Opinion polls, interviews
- DELPHI
(b) Methods based on averaging of past data
- Moving averages
- Exponential Smoothing
(c) Regression models on historical data
- Trend extrapolation
(d) Causal or econometric models

(e) Time - series analysis using stochastic models

- Box Jenkins model

14
 20-09-2019

FORECASTING PREDICTION

- Objective - Subjective
- Scientific - Intuitive
- Free from ‘BIAS’ - Individual BIAS
- Reproducible - Non - Reproducible
- Error Analysis Possible - Error Analysis Limited

Components of Demand
• Average demand for a period of time
• Trend
– E.g., Linear; S-Curve; Asymptotic; Exponential
• Seasonal element
• Cyclical elements
– E.g., political elections, war, economy
• Random variation (chance events)
• Autocorrelation
– Value expected at any point is highly correlated
with its past values (e.g., length of waiting lines,
records of football teams?)

15
 20-09-2019

Demand Patterns
• Time Series: The repeated observations of demand for a
service or product in their order of occurrence.
• There are five basic patterns of most time series.
a. Horizontal. The fluctuation of data around a constant mean.
b. Trend. The systematic increase or decrease in the mean of
the series over time.
c. Seasonal. A repeatable pattern of increases or decreases in
demand, depending on the time of day, week, month, or
season.
d. Cyclical. The less predictable gradual increases or decreases
over longer periods of time (years or decades).
e. Random. The unforecastable variation in demand.

Demand Patterns

Horizontal Trend

Seasonal Cyclical

16
 20-09-2019

ABNORMAL DEMAND
PATTERNS

Transient Sudden Sudden

Impulse Rise Fall

Finding Components of Demand

Seasonal variation

x Linear
x x
x x
x x x Trend
Sales

x
x x x
x
x
xx
x xx x x
x
x
x x x x x x
x x xxx x
x x x
x xxxxx
x
x x

1 2 3 4
Year

17
 20-09-2019

Qualitative Methods

Executive Judgment Grass Roots

Qualitative Market Research

Historical analogy
Methods

Delphi Method Panel Consensus

Delphi Method (Rand Corporation – 1950’s)

l. Choose the experts to participate representing
a variety of knowledgeable people in different
areas
2. Through a questionnaire (or E-mail), obtain
forecasts (and any premises or qualifications
for the forecasts) from all participants
3. Summarize the results and redistribute them
to the participants along with appropriate new
questions
4. Summarize again, refining forecasts and
conditions, and again develop new questions
5. Repeat Step 4 as necessary and distribute the
final results to all participants

18
 20-09-2019

Expert 1

Coordinator Expert 2

Expert n

A Statistical
• Mean summary
•Median can be given
1990 1995 2000 2005 2010 •Std. deviation at end of
year each round

DELPHI (Contd.)
Round
1

Moving
Towards
Consensus
Round
2

Round
3

19
 20-09-2019

DELPHI (Contd.)
Round
1
Moving
Towards
Divergent
View Points Round
2

Round
3

DELPHI
A structured method of obtaining responses from
experts.
• Utilizes the vast knowledge base of experts
• Eliminates subjective bias and ‘influencing’ by
members through anonymity
• Iterative in character with statistical summary
at end of each round (Generally 3 rounds)
• Consensus (or Divergent Viewpoints)
usually emerge at the end of the exercise.

20
 20-09-2019

Forecasting Demand for Example

• The production scheduler can use this

forecast of 183,016 units to determine
the quantity of brass door hinges
needed for month 6.
• If there are 62,500 units in stock, then
the requirement to be filled from
production is 183,016 - 62,500 =
120,516 units.

Forecasting Error

• For any forecasting method, it is important

to measure the accuracy of its forecasts.
• Forecast error is the difference found by
subtracting the forecast from actual
demand for a given period.
Et = Dt - Ft
where
Et = forecast error for period t
Dt = actual demand for period t
Ft = forecast for period t

21
 20-09-2019

Time Series Analysis

• Time series forecasting models try to predict
the future based on past data
• You can pick models based on:
1. Time horizon to forecast
2. Data availability
3. Accuracy required
4. Size of forecasting budget
5. Availability of qualified personnel
6. Degree of flexibility and ability to react to
changes
7. Consequences of a bad forecast (e.g.,
capital expense)

How would you suggest we

estimate sales in Week 3, given
we have actual data only
for Weeks 1 and 2?

22
 20-09-2019

Simple Moving Average Formula

• The simple moving average model assumes an
average is a good estimator of future behavior
• The formula for the simple moving average is:

A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
n

Ft = Forecast for the coming period

N = Number of periods to be averaged
A t-1 = Actual occurrence in the past
period for up to “n” periods

Simple Moving Average Problem (1)

A t-1 + A t-2 + A t-3 +...+A t- n
Ft =
Week Demand n
1 650
2 678
3 720 Question: What are the 3-
4 785 week and 6-week moving
5 859 average forecasts for
6 920 demand?
7 850
8 758
Assume you only have 3
9 892 weeks and 6 weeks of
10 920 actual demand data for
11 789 the respective forecasts
12 844

23
 20-09-2019

Calculating the moving averages gives us:

Week Demand 3-Week 6-Week

1 650 F4=(650+678+720)/3
2 678 =682.67

3 720 F7=(650+678+720
+785+859+920)/6
4 785 682.67
=768.67
5 859 727.67
6 920 788.00
7 850 854.67 768.67
8 758 876.33 802.00
9 892 842.67 815.33
10 920 833.33 844.00
11 789 856.67 866.50
12 844 867.00 854.83

Plotting the moving averages and comparing them shows how

the lines smooth out to reveal the overall upward trend in this
example

950
900
850
d 800 Demand
n 750
a 3-Week
m 700
e
D 650 6-Week
600
550 Note how the 3-
500 Week is
1 2 3 4 5 6 7 8 9 10 11 12
smoother than
Week the Demand, and
6-Week is even
smoother

24
 20-09-2019

For this reason

it
makes more sense to calculate
a moving average rather than a
simple average:
that is,an average where we
use a given number of the most
recent weeks.

CHARACTERISTICS OF
MOVING AVERAGES

Dt Dt

t t

(1) MOVING AVERAGES LAG A TREND

25
 20-09-2019

Dt

(2) MOVING AVERAGES ARE OUT OF PHASE

FOR CYCLIC DEMAND

Dt

(3) MOVING AVERAGES FLATTEN PEAKS

26
 20-09-2019

Simple Moving Average Problem (2)

Data

Question: What are the 3

week and 5 week
moving average
Week Demand
forecasts for this data?
1 820
Assume you only have 3
2 775
weeks and 5 weeks of
3 680
actual demand data for
4 655
the respective forecasts
5 620
6 600
7 575

Simple Moving Average Problem (2)

Solution
Week Demand 3-Week 5-Week
1 820 F4=(820+775+680)/3
=758.33
2 775
F6=(820+775+680
3 680 +655+620)/5
=710.00
4 655 758.33
5 620 703.33
6 600 651.67 710.00
7 575 625.00 666.00

27
 20-09-2019

Simple Moving Average Formula

• Demand should not be increasing or
decreasing rapidly
• Demand should not have seasonal
characteristics
• Longer moving average period leads to
decreasing effects of randomness, but trends
are increasingly lagged
• Shorter moving average periods create more
oscillation but more closely follow trends

The moving-average model developed in the previous

section poses the two questions regarding its use and
development.

• How many periods should be used in

calculating the average?
• Is it logical in the context of the problem
for each item used to have an equal
weight in the calculation?

28
 20-09-2019

Weighted Moving Average

Formula

While the moving average formula implies an equal

weight being placed on each value that is being
averaged, the weighted moving average permits an
unequal weighting on prior time periods

The formula for the moving average is:

F t = w 1 A t -1 + w 2 A t - 2 + w 3 A t - 3 + ... + w n A t - n
n

wt = weight given to time period “t” w

i =1
i =1

occurrence (weights must add to one)

Weighted Moving Average Problem

(1) Data
Question: Given the weekly demand and weights, what is the forecast
for the 4th period or Week 4?

Week Demand Weights:

1 650
2 678 t-1 .5
3 720 t-2 .3
4 t-3 .2

Note that the weights place more emphasis on the most recent
data, that is time period “t-1”

29
 20-09-2019

Weighted Moving Average Problem (1)

Solution
Week Demand Forecast
1 650
2 678
3 720
4 693.4

F4 = 0.5(720)+0.3(678)+0.2(650)=693.4

Weighted Moving Average Problem (2)

Data
Question: Given the weekly demand information and weights,
what is the weighted moving average forecast of the 5th period or
week?

Week Demand Weights:

1 820 t-1 .7
2 775 t-2 .2
3 680
t-3 .1
4 655

30
 20-09-2019

Weighted Moving Average Problem (2)

Solution

Week Demand Forecast

1 820
2 775
3 680
4 655
5 672

F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672

Question?
• How do we establish what the weights
should be?
• The method used by this model is to use
weights which follow what is known as an
exponential pattern
• It can be seen that the individual weights
gradually decrease over time,

31
 20-09-2019

EXPONENTIAL SMOOTHING
Ft = one period ahead forecast made at
time time t
Dt = actual demand for period t
 = Smoothing constant (between 0 & 1)
(generally chosen values tie between
0.01 and 0.3)
Ft-1 +  (Dt - Ft-1)
Ft =
New forecast = Old forecast +α(last forecast error)

Ft =  Dt +(1 - ) Ft-1
=  Dt +(1 - ) [ Dt-1 +(1 - )2 Ft-2 ]
=……..
=  [Dt +(1 - ) Dt-1 +(1 - )2 Dt-2 + …..
+ (1 - )t-1 D1 + (1 - )t F0]


 (1- )
 (1- )2
t-2 t-1 t

Weightages given to past data decline

exponentially.

32
20-09-2019

33
 20-09-2019

Exponential Smoothing Model

Ft = Ft-1 + (At-1 - Ft-1)

Where :
Ft  Forcast va lue for the coming t time period
Ft - 1  Forecast v alue in 1 past time period
At - 1  Actual occurance in the past t tim e period
  Alpha smoothing constant
• Premise: The most recent observations
might have the highest predictive value
• Therefore, we should give more weight to
the more recent time periods when
forecasting

Exponential Smoothing Problem (1)

Data

Week Demand
1 820 Question: Given the
2 775 weekly demand data,
3 680 what are the
4 655 exponential smoothing
5 750 forecasts for periods 2-
6 802 10 using =0.10 and
7 798 =0.60?
8 689 Assume F1=D1
9 775
10

34
 20-09-2019

Answer: The respective alphas columns denote the forecast values.

Note that you can only forecast one time period into the future.

Week Demand 0.1 0.6

1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28

Exponential Smoothing Problem

(1) Plotting
Note how that the smaller alpha results in a smoother line in this
example

850
800
d750 Demand
n700
a 0.1
m650
e600 0.6
D
550
500
1 2 3 4 5 6 7 8 9 10
Week

35
 20-09-2019

Exponential Smoothing Problem (2)

Data

Question: What are the

Week Demand
exponential smoothing
1 820
forecasts for periods
2 775 2-5 using a =0.5?
3 680
4 655
5 Assume F1=D1

Exponential Smoothing Problem (2)

Solution
F1=820+(0.5)(820-820)=820 F3=820+(0.5)(775-820)=797.75

Week Demand 0.5

1 820 820.00
2 775 820.00
3 680 797.50
4 655 738.75
5 696.88

36
 20-09-2019

The Alpha Smoothing Constant

• Alpha determines the level of smoothing and the
speed of reaction to changes
• Increasing growth / increasing reaction rate:
Higher value of alpha
• Forecasts lag during increase or decrease and
tend to “overshoot” when changes in direction
occur
– Forecast Including Trend (FIT) uses a smoothing
constant Delta…
• How to choose Alpha?
– Use different values based on errors
– Use tracking signals…

Trend-adjusted exponential
smoothing

37
 20-09-2019

Seasonal Patterns

38
 20-09-2019

Seasonal Patterns
• Seasonal patterns are regularly repeated upward
or downward movements in demand measured in
periods of less than one year.
– An easy way to account for seasonal effects is to use one
of the techniques already described but to limit the data in
the time series to those time periods in the same season.

• If the weighted moving average method is used,

high weights are placed on prior periods belonging
to the same season.
– Multiplicative seasonal method is a method whereby
seasonal factors are multiplied by an estimate of average
demand to arrive at a seasonal forecast.
– Additive seasonal method is a method whereby
seasonal forecasts are generated by adding a constant to
the estimate of the average demand per season.

39
 20-09-2019

Multiplicative Seasonal
Method
• Step 1: For each year, calculate the average
demand for each season by dividing annual
demand by the number of seasons per year.
• Step 2: For each year, divide the actual demand for
each season by the average demand per season,
resulting in a seasonal index for each season of the
year, indicating the level of demand relative to the
average demand.
• Step 3: Calculate the average seasonal index for
each season using the results from Step 2. Add the
seasonal indices for each season and divide by the
number of years of data.
• Step 4: Calculate each season’s forecast for next
year.

40
 20-09-2019

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Using the Multiplicative
Seasonal Method
Example 13.5: Stanley Steemer, a carpet cleaning company
needs a quarterly forecast of the number of customers expected next
year. The business is seasonal, with a peak in the third quarter and a
trough in the first quarter.
Forecast customer demand for each quarter of year 5, based on an
estimate of total year 5 demand of 2,600 customers.

Quarter Year 1 Year 2 Year 3 Year 4

1 45 70 100 100
2 335 370 585 725
3 520 590 830 1160
4 100 170 285 215
Total 1000 1200 1800 2200

Demand has been increasing by an average of 400 customers each year. The forecast
demand is found by extending that trend, and projecting an annual demand in year 5 of 2,200
+ 400 = 2,600 customers.
Rajeev Agrawal, MET-304 (Introduction)

Example 13.5 OM Explorer Solution

© 2007 Pearson Education

41
 20-09-2019

Application 13.3 Multiplicative Seasonal Method

1320/4 quarters = 330

Comparison of
Seasonal Patterns

Multiplicative pattern Additive pattern

42
 20-09-2019

Seasonality-adjusted
exponential smoothing

Forecast errors

Improved forecasting accuracy leading to a reduction in lost sales and in excess stock.

43
 20-09-2019

Forecast Accuracy

87

Accuracy and Control of

Forecasts
• Error: Difference between the actual value and
the value that was predicted for a given period
et = At – Ft

• Forecast errors influence decisions in two

somewhat different ways
1. A choice between various forecasting alternatives
2. Evaluate the success or failure of a technique in use

88

44
 20-09-2019

Measures of Forecast Accuracy

• Mean Absolute Deviation (MAD)
 Actualt  Forecastt
MAD =
n

• Mean Squared Error (MSE) 2

MSE =  ( Actualt  Forecastt)
n -1
• Mean Absolute Percent Error (MAPE)

Actualt  Forecastt
 × 100
Actualt
MAPE =
n 89

Example 9
Period Actual Forecast (A-F) |A-F| (A-F) 2 (|A-F|/Actual)×100
1 217 215 2 2 4 0.92
2 213 216 -3 3 9 1.41
3 216 215 1 1 1 0.46
4 210 214 -4 4 16 1.90
5 213 211 2 2 4 0.94
6 219 214 5 5 25 2.28
7 216 217 -1 1 1 0.46
8 212 216 -4 4 16 1.89
-2 22 76 10.26

MAD=  ‫׀‬e ‫׀‬/ n = 22 / 8 = 2.75

MSE =  e2/ (n-1) = 76 / 7 = 10.86
MAPE = 10.26/8 = 1.28

90

45
 20-09-2019

Forecast Accuracy
• Two aspects of forecast accuracy can have potential
significance when deciding among forecasting
alternatives :

1. Historical error performance of a forecast

choose the one yields the lowest MAD, MSE, or MAPE

2. The ability of a forecast to respond to changes

the cost of not responding quickly to a change relative to the
cost of responding to changes that are not really there

91

Measures of Forecast Error

• Cumulative sum of forecast errors (CFE): A

measurement of the total forecast error that assesses
the bias in a forecast.
CFE = Et
• Mean squared error (MSE): A measurement of the
dispersion of forecast errors.
MSE =
Et2
n
• Mean absolute deviation (MAD): A measurement of the
dispersion of forecast errors.
MAD =
|Et |
n
• Standard deviation (): A measurement
of the dispersion of forecast errors. = (Et – E )2
n–1

46
 20-09-2019

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Measures of Forecast Error

Mean absolute percent error (MAPE): A

measurement that relates the forecast error to the
level of demand and is useful for putting forecast
performance in the proper perspective.

MAPE =
[ |E | / Dt ](100)
t
n

Rajeev Agrawal, MET-304 (Introduction)

Measures of Forecast Error:

Tracking Signal Formula
• The Tracking Signal or TS is a measure that
indicates whether the forecast average is
keeping pace with any genuine upward or
downward changes in demand.
• Depending on the number of MAD’s selected,
the TS can be used like a quality control
chart indicating when the model is
generating too much error in its forecasts.
• The TS formula is:
RSFE Running sum of forecast errors
TS = =
MAD Mean absolute deviation

47
 20-09-2019

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Calculating Forecast Error

Example
The following table shows the actual sales of
upholstered chairs for a furniture manufacturer and
the forecasts made for each of the last eight months.
Calculate CFE, MSE, MAD, and MAPE for this product.
Absolute
Error Absolute Percent
Month, Demand, Forecast, Error, Squared, Error, Error,
t Dt Ft Et Et2 |Et| (|Et|/Dt)(100)
1 200 225 -25 625 25 12.5%
2 240 220 20 400 20 8.3
3 300 285 15 225 15 5.0
4 270 290 –20 400 20 7.4
5 230 250 –20 400 20 8.7
6 260 240 20 400 20 7.7
7 210 250 –40 1600 40 19.0
8 275 240 35 1225 35 12.7
Total –15 5275 195 81.3%
Rajeev Agrawal, MET-304 (Introduction)

Example Forecast Error Measures

Cumulative forecast error (bias): CFE = – 15

– 15
Average forecast error (mean bias): E= = – 1.875
8
5275
Mean squared error: MSE = = 659.4
8

Standard deviation:  = 27.4

195
Mean absolute deviation: MAD = = 24.4
8

81.3%
Mean absolute percent error: MAPE = = 10.2%
8
CFE -15
Tracking signal = = = -0.6148
MAD 24.4

48
 20-09-2019

The MAD (Mean Absolute Deviation)

Statistic to Determine Forecasting Error
n
1 MAD  0.8 standard deviation
A
t=1
t - Ft
1 standard deviation  1.25 MAD
MAD =
n

• The ideal MAD is zero which would

mean there is no forecasting error
• The larger the MAD, the less the
accurate the resulting model
• MAD measures dispersion like Standard
Deviation

Mean absolute deviation

• For this data series calculate a four-week moving average. Calculate

the MAD of these forecasts and compare it with that of the two-
week moving average.

49
 20-09-2019

MAD Problem Data

Question: What is the MAD value

given the forecast values in the table
below?

Month Sales Forecast

1 220 n/a
2 250 255
3 210 205
4 300 320
5 325 315

MAD Problem Solution

Month Sales Forecast Abs Error
1 220 n/a
2 250 255 5
3 210 205 5
4 300 320 20
5 325 315 10

40

n
Note that by itself, the MAD
A
t=1
t - Ft
40 only lets us know the mean
MAD = = = 10 error in a set of forecasts
n 4

50
 20-09-2019

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Forecast Error Ranges

Forecasts stated as a single value can be less useful because they
do not indicate the range of likely errors. A better approach can be
to provide the manager with a forecasted value and an error range.

% of area of normal probability distribution within control limits of the tracking signal

Control Limit Spread Equivalent Percentage of Area

(number of MAD) Number of  within Control Limits

± 1.0 ± 0.80 57.62

± 1.5 ± 1.20 76.98
± 2.0 ± 1.60 89.04
± 2.5 ± 2.00 95.44
± 3.0 ± 2.40 98.36
± 3.5 ± 2.80 99.48
± 4.0 ± 3.20 99.86

Rajeev Agrawal, MET-304 (Introduction)

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Computer Support
Computer support, such as OM Explorer, makes error calculations
easy when evaluating how well forecasting models fit with past data.

+2.0 — Out of control

Control limit
+1.5 —
+1.0 —
Tracking signal

+0.5 —
0—
–0.5 —
CFE
–1.0 — Tracking signal =
MAD
Control limit
–1.5 —
| | | | |
010 515 20 25
Observation number
Rajeev Agrawal, MET-304 (Introduction)

51
 20-09-2019

Rajeev Agrawal, MET-304 (Operation and Planning Control)

OM Solver Output for Medical Clinic Patient Arrivals

Rajeev Agrawal, MET-304 (Introduction)

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Results Sheet
Moving Average

Forecast for 7/17/06

Rajeev Agrawal, MET-304 (Introduction)

52
 20-09-2019

Results Sheet
Weighted Moving Average

Forecast for 7/17/06

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Results Sheet
Exponential Smoothing

Forecast for 7/17/06

Rajeev Agrawal, MET-304 (Introduction)

53
 20-09-2019

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Results Sheet
Trend-Adjusted ,Exponential Smoothing

Forecast for 7/17/06

Forecast for 7/24/06
Forecast for 7/31/06
Forecast for 8/7/06
Forecast for 8/14/06
Forecast for 8/21/06

Rajeev Agrawal, MET-304 (Introduction)

Quantitative Forecasting Methods

Quantitative
Forecasting

Time Series Associative

Forecasting Models

Naïve Averaging Trend Seasonality  Linear regression

 Curvilinear regression
(not req.)
 Multiple regression
 Moving Average  Linear trend  Additive (not req.)
 Weighted Moving – linear trend equation  Multiplicative
Average
– trend-adjusted Seasonality
 Exponential exponential adjusted
smoothing smoothing exponential
- Nonlinear trend (not smoothing 108
req.)

54
 20-09-2019

Time Series Data

- Trend
109

Techniques for Trend

• Linear trend
– linear trend equation
– Trend-adjusted exponential smoothing
(Double exponential smoothing), not
required in exams

• Nonlinear trend (not required in exams)

110

55
 20-09-2019

Linear Trend Equation

Ft

Ft = a + b t

0 1 2 3 4 5 t

• Ft = Forecast for period t

• t = Specified number of time periods from t
=0
• a = Value of Ft at t = 0
111
• b = Slope of the line

Calculating a and b
n  (ty) -  t  y
b = 2 2
n  t - ( t)

 y - b t
a =
n

• n = Number of periods
• y = Value of the time series
• t = Specified number of time periods from t
=0 112

56
 20-09-2019

Example
• Calculator sales for a California-based firm over the
last 10 weeks are shown in the following table.

Week (t) y yt t2
1 700 700 1
2 724 1448 4
3 720 2160 9
4 728 2912 16
5 740 3700 25
6 742 4452 36
7 758 5306 49
8 750 6000 64
9 770 6930 81
10 775 7750 100
 55 7407 41358 385 113

Solution to Example
1. Plot the data, and visually check to see if
a linear trend line would be appropriate.
n  (ty) -  t  y  y - b t
b = 2 2 a =
n t - ( t) n

2. n = 10,  t = 55,  y =7407,  ty = 41358, t2 =

385 10(41358) - 55(7407) 413580 - 407385
b = = ≈ 7.51
10(385) - 55(55) 3850 - 3025
7407 - 7.51(55)
a = ≈ 699.40
10
y = 699.40 + 7.51t
114

57
 20-09-2019

Solution to Example (Cont.)

800
780
760
740
720
700 Observed
680
Trend line
660
1 2 3 4 5 6 7 8 9 10
115

Solution to Example (Cont.)

3. Then determine the equation of the
trend line, and predict sales for weeks
11 andy 12.
=699.40 + 7.51(11) = 782.01
11

y12 =699.40 + 7.51(12) = 789.51

116

58
 20-09-2019

Solution to Example (Cont.)

800
780
760
740
720
700 Observed
680
Trend line
660
1 2 3 4 5 6 7 8 9 10
117

Criteria for Selecting

Time-Series Methods
• Forecast error measures provide important information for
choosing the best forecasting method for a service or product.
• They also guide managers in selecting the best values for the
parameters needed for the method:
– n for the moving average method, the weights for the weighted
moving average method, and  for exponential smoothing.
• The criteria to use in making forecast method and parameter
choices include
1. minimizing bias
2. minimizing MAPE, MAD, or MSE
3. meeting managerial expectations of changes in the
components of demand
4. minimizing the forecast error last period

59
 20-09-2019

Using Multiple Techniques

• Research during the last two decades suggests that combining

forecasts from multiple sources often produces more accurate
forecasts.
• Combination forecasts: Forecasts that are produced by
averaging independent forecasts based on different methods
or different data or both.
• Focus forecasting: A method of forecasting that selects the
best forecast from a group of forecasts generated by individual
techniques.
– The forecasts are compared to actual demand, and the
method that produces the forecast with the least error is
used to make the forecast for the next period. The method
used for each item may change from period to period.

True/False Questions
1. Naïve forecasts are essentially subjective forecasts. F
2. Forecasts for individual items tend to be less accurate
than forecasts for groups of similar items.
T
3. In single-factor exponential smoothing, the forecasted
values tend to lag behind the actual values. T
4. Forecasts accuracy decreases as the time horizon
increases.
T
5. Delphi techniques is a forecasting model that
incorporates the use of multiple regression. F
6. Forecasting techniques generally assume an existing
casual system that will continue to exist in the future. T

120

60
 20-09-2019

Associative Forecasting

121

Causal Methods
Linear Regression
• Causal methods are used when historical data are
available and the relationship between the factor to
be forecasted and other external or internal factors
can be identified.
• Linear regression: A causal method in which one
variable (the dependent variable) is related to one or
more independent variables by a linear equation.
• Dependent variable: The variable that one wants to
forecast.
• Independent variables: Variables that are
assumed to affect the dependent variable and
thereby “cause” the results observed in the past.

61
 20-09-2019

Associative Forecasting
• Associative techniques rely on identification of related
variables that can be used to predict the variable of
interest (dependent variable)
– Example 1: Crop yields are related to soil conditions and the
amounts and timing of water and fertilizer applications.
• Predictor (independent) variables - used to predict
values of variable of interest
• Regression - technique for fitting a line to a set of points

123

Dependent and Independent

Variables

124

62
 20-09-2019

Relationship Between
Variables

Regression analysis involves

relating the variable of interest
(Y), known as the dependent
variable, to one or more input
(or predictor or explanatory)
variables (X).

The regression line

represents the expected value
of Y, given the value(s) of the
inputs.

Relationship Between
Variables

The regression relationship

has a predictable component
(the relationship with the
inputs) and an unpredictable
(random error) component.
Thus, the observed values of
(X, Y) will not lie on a straight
line.

63
 20-09-2019

Simple Linear Regression

Introduction to
Regression Analysis
Equation

In practice, we will be using

sample data to develop a
line.

The simple linear regression

equation on the right
provides an estimate of the
population regression line.

yc = a + b x

Linear Regression
• The object of linear regression is to obtain an
equation of a straight line (Least squares line) that
minimizes the sum of squared vertical deviations of
the data points from the line.

yc = a + b x
Where
yc = Predicated (dependent) variable.
x = Predictor (independent) variable.
a = Value of yc when x = 0.
b = Slope of the line.

128

64
 20-09-2019

Calculating Coefficients a and b

n  (xy) -  x y
b = 2 2
n  x - ( x)
 y - b x
a = =y–bx
n
where
n = Number of paired observations

129

Example 8 – Linear Model

Seems Reasonable
n = 12
n  (xy) -  x y
x y xy x2 y2 b = 2 2
7
2
15
10
105
20
49
4
225
100
n  x - ( x)
6 13 78 36 169
4 15 60 16 225
 y - b x
14 25 350 196 625
a = =y–bx
15
16
27
24
405
384
225
256
729
576 n
12 20 240 144 400
14 27 378 196 729
12  3529  132  271
20 44 880 400 1936 b  1.593
15 34 510 225 1156 12  1796  1322
7 17 119 49 289
132 271 3529 1796 7159 271  1 .593  132
a  5 .06
12

130

65
 20-09-2019

Example – Linear Model Seems Reasonable

n = 12 Computed
x y xy x2 y2
7 15 105 49 225
relationship
2 10 20 4 100
50
6 13 78 36 169
4 15 60 16 225 40

14 25 350 196 625 30

15 27 405 225 729 20

16 24 384 256 576 10

12 20 240 144 400 0

0 5 10 15 20 25
14 27 378 196 729
20 44 880 400 1936
15 34 510 225 1156
7 17 119 49 289 A straight line is fitted to a set
132 271 3529 1796 7159
of sample points.
12  3529  132  271
b  1.593
12  1796  1322 yc = 5.06 +1.593 x
271  1 .593  132
a  5 .06 131
12

Correlation
This image cannot currently be display ed.

• A measure of the strength and direction of the relationship

between two variables. Correlation can range from -1.00 to
+1.00.
n  (xy) - x  y
r =
n x2 - ( x)2 n y2 - ( y)2
12  3529  132  271
In Example 8, r   0.917  r 2  0.84
12 1796  132  12  7159  271
2 2

• The square of the correlation coefficient, r2, provides a

measure of how well a regression line “fits” the data.
– The higher r2 , the better. r2 >=0.8, then the independent variable is
a good indicator of the dependent variable; r2 < = 0.25 , poor
indicator; otherwise, moderate indicator. 132

66
 20-09-2019

Curvilinear and Multiple

Regression Analysis
• When nonlinear relationship are present,
we must employ curvilinear regression.
• Models that involve more than one predictor
require the use of multiple regression
analysis.

133

Choosing a Forecasting Technique

Forecasting Amount of Forecast Personnel
Methods Historical Data Data Pattern Horizon Preparation Time Background

Little
Moving Average 2 to 30 obs. Stationary Short Short Sophistication
Simple
Exponental
Smoothing 5 to 10 obs. stationary Short Short Little
10 to 20;
for seasonality at Short to
Trend Models least 5 per season Trend medium Short Moderate
Handle
cyclical
Enough to see 2 and seasonal Short to
Seasonal peaks and troughs Patterns medium Short to moderate Little

Casual Can handle Short, Long development

Regression 10 observations per complex medium, time, short time for Considerable
Models independent var. patterns or long implementation Sophistication

67
 20-09-2019

Multiple-Choice Questions
1. Which of the following techniques generates
trend forecasts?
a. Delphi method b. weighted moving average
c. Moving average d. Single factor exponential
smoothing e. None of the above

2. What is the MAD for forecast errors of +4, -2,

+1, -1?
a. 0.00 b. 0.50 c. 1.00 d. 1.50 e. 2.00
135

The Multiple Regression Model

68
 20-09-2019

Least Squares Estimators for Linear

Models with two Independent
Variables

  2   
  ( yi  y ( x1i  x1   ( x2 i  x2      ( yi  y ( x2 i  x2   ( x1i  x1 ( x2 i  x2 
b1   i   i   i   i 
2
 2  2  
  ( x1i  x1    ( x2 i  x2      ( x1i  x1 ( x2 i  x 2 
 i  i   i 

  2   
  ( yi  y ( x2 i  x2   ( x1i  x1      ( yi  y ( x1i  x1   ( x2 i  x2 ( x1i  x1 
b2   i   i   i   i 
2
 2  2  
  ( x1i  x1    ( x2 i  x2      ( x1i  x1 ( x2 i  x2 
 i  i   i 

b0  y  b1 x1  b2 x 2

Multiple Linear Regression

Least Square Estimators
Too
We have to calculate the coefficients
for each of the independent variable, complicated
but after seeing the arithmetic for
multiple regression with two by hand!
independent variables in the
previous slide, you might guess,
quite rightly, that the arithmetic is
even more messy for a regression
with more than two independent
variables.

This is why multiple regression is

never tackled by hand.

Thankfully, a lot of standard

software includes multiple
regression as a standard function.

69
 20-09-2019

Simple Linear Regression Problem

Data
Question: Given the data below, what is the simple linear regression model
that can be used to predict sales in future weeks?

Week Sales
1 150
2 157
3 162
4 166
5 177

140
Answer: First, using the linear regression formulas, we can compute “a”
and “b”

Week Week*Week Sales Week*Sales

1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885
3 55 162.4 2499
Average Sum Average Sum

b=
 xy - n( y)(x) = 2499 - 5(162.4)(3)  63 = 6.3
 x 2 - n(x )2 55  5( 9 ) 10

a = y - bx = 162.4 - (6.3)(3) = 143.5

70
 20-09-2019

141

The resulting regression

model is: Yt = 143.5 +
6.3x
Now if we plot the regression generated forecasts against the actual sales
we obtain the following chart:

180
175
170
165
160 Sales

155
Sales

Forecast
150
145
140
135
1 2 3 4 5
Period

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Causal Methods
Linear Regression
Y Deviation, Regression
Estimate of or error equation:
Y from Y = a + bX
regression
equation
{ Y = dependent variable
Dependent variable

Actual X = independent variable

a = Y-intercept of the line
value b = slope of the line
of Y

Value of X used
to estimate Y

X
Independent variable

Rajeev Agrawal, MET-304 (Introduction)

71
 20-09-2019

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Linear Regression
Example
The following are sales and advertising data for the past 5 months for
brass door hinges. The marketing manager says that next month the
company will spend $1,750 on advertising for the product. Use linear
regression to develop an equation and a forecast for this product.

We use the computer to determine

Sales Advertising the best values of a, b, the correlation
Month (000 units) (000 $) coefficient (r), the coefficient of
1 264 2.5 determination (r2), and the standard
2 116 1.3 error of the estimate (syx).
3 165 1.4
a = – 8.135
4 101 1.0
5 209 2.0 b = 109.229X
r = 0.98
r2 = 0.96
syx= 15.603
Rajeev Agrawal, MET-304 (Introduction)

Rajeev Agrawal, MET-304 (Operation and Planning Control)

Linear Regression Line for

Example
300 —
Y = a + bX
Sales (thousands of units)

250 — Y = – 8.135 + 109.229X

200 —
a = – 8.135
150 — b = 109.229X
r = 0.98
100 — r2 = 0.96
syx= 15.603
50 —
| | | |
1.0 1.5 2.0 2.5
Advertising (thousands of dollars)

Forecast for Month 6: X = $1750, Y = – 8.135 + 109.229(1.75) = 183,016

Rajeev Agrawal, MET-304 (Introduction)

72
 20-09-2019

Web-Based Forecasting: CPFR

Defined
• Collaborative Planning, Forecasting, and
Replenishment (CPFR) a Web-based tool used to
coordinate demand forecasting, production and
purchase planning, and inventory replenishment
between supply chain trading partners.
• Used to integrate the multi-tier or n-Tier supply chain,
including manufacturers, distributors and retailers.
• CPFR’s objective is to exchange selected internal
information to provide for a reliable, longer term
future views of demand in the supply chain.
• CPFR uses a cyclic and iterative approach to derive
consensus forecasts.

Web-Based Forecasting:
Steps in CPFR
1. Creation of a front-end partnership agreement
2. Joint business planning
3. Development of demand forecasts
4. Sharing forecasts
5. Inventory replenishment

73
 20-09-2019

Forecasting as a Process
The forecast process itself, typically done on a
monthly basis, consists of structured steps. They
often are facilitated by someone who might be called
a demand manager, forecast analyst, or
demand/supply planner.

Some Principles for the Forecasting Process

• Better processes yield better forecasts.
• Demand forecasting is being done in virtually every company.
The challenge is to do it better than the competition.
• Better forecasts result in better customer service and lower
costs, as well as better relationships with suppliers and
customers.
• The forecast can and must make sense based on the big
picture, economic outlook, market share, and so on.
• The best way to improve forecast accuracy is to focus on
reducing forecast error.
• Bias is the worst kind of forecast error; strive for zero bias.
• Whenever possible, forecast at higher, aggregate levels.
Forecast in detail only where necessary.
• Far more can be gained by people collaborating and
communicating well than by using the most advanced
forecasting technique or model.
© 2007 Pearson Education

74
 20-09-2019

Development of an
Econometric Model

Selection of the Dependent Variable

Demand for air travel is usually measured by:

–Departures
–Number of passengers
–Revenue Passenger Kilometres (RPKs)
–Tonnes of freight
–Freight tonne kilometres (FTKs)

Therefore, the above indictors are normally used as the

dependent variable in the regression analysis.

Can you…
• describe general forecasting process?
• compare and contrast trend, seasonality
and cyclicality?
• describe the forecasting method when
data is stationary?
• describe the forecasting method when
data shows trend?
• describe the forecasting method when
data shows seasonality? 150

75